Hello! This week we take a look at the new, ‘alternative internet’ project being developed by the founders of Telegram and we have the highlights of our interview with the former Russia head of Morgan Stanley (the foreign investment back recently shut down its last operations in Russia). We also look briefly at the tactics billionaire Oleg Deripaska may be using to evade sanctions, how Putin wants Russia to develop AI, the story of the Russian-trained businessmen taking the U.S. cannabis market by storm and the Putin-linked rapper working with the Defense Ministry to create his own clothing brand.
The developers of Telegram want to launch a super secret internet
The creators of Telegram, brothers Nikolai and Pavel Durov, want to launch an alternative internet, TON, by October 31. This is most significant for Russia, where the so-called sovereign internet law will go into effect November 1, giving the authorities the right to cut off the Russian internet from the rest of the world. The Bell studied a 400-page technical document on the the Durovs’ internet ‘alternative’, which uses blockchain technology.
- How will it work? The blockchain platform Telegram Open Network, or TON, will be similar to a protected and expandable internet. It will have websites (the same websites accessible on the “normal” internet) and additional services like its own app store, the payment system TON Payments, the file storage system TON Storage, the TON Proxy anonymizer, and its own DNS, which will shorten complex addresses. It’s likely users will be able to pay for services through the German electronic payments platform, Wirecard, and the primary currency will be TON’s own cryptocurrency, Gram.
- Is it really free? TON should be free: the platform uses a cryptographic system that has been called “the most advanced system in existence today”. According to technical documentation, TON will digitize everything. The founders of Telegram have repeatedly refused governments’ requests to give access to user data and there is no reason to suggest that their position vis a vis TON will be any different.
- How much does it cost? Last year, Telegram’s audience, for which TON is being developed, reached 200 million users, and it should soon reach 300 million. In 2018, the TON team carried out two ICO rounds and raised $1.7 billion. Investors valued the project at a minimum of $3 billion.
- Who is financing TON? There isn’t a public list of investors, but media outlets have reported that investors include billionaire Roman Abramovich, major Russian businessmen like Sergei Solonin and David Yakobashvili, and influential Silicon Valley funds including Kleiner Perkins Caufield & Byers, Benchmark and Sequoia Capital.
Why the world should care
If TON can really guarantee total privacy, then it would be a web revolution. And it would likely not only be popular in Russia, but also in other countries with restrictions on internet access.
“The investment risk isn’t just high, it’s prohibitively high”: The former head of Morgan Stanley in Russia on why the bank decided to quit
In early May, the most successful foreign investment bank in Russia, Morgan Stanley, announced it was leaving. This was a telling announcement: in Russia, the bank had run IPOs for oil giants like Lukoil and Rosneft, and advised the Russian government on major M&A transactions. Unlike other big international investment banks, Morgan Stanley didn’t close its Moscow office after the 1998 crisis. The Bell spoke with Rair Simonyan, who was the head of Morgan Stanley in Russia for 14 years. You can read the full interview in Russian here, but we have selected some of the best quotes:
From opportunity to too many uncertainties
“When the USSR opened up, everyone had to stake out a position very quickly. Everyone wanted a piece of Russia. In 1998, we remained because the option value was small: the office wasn’t large, the operating costs were low. The early 2000s became a period of opportunity. We brought hundreds of millions of dollars to Russia, and tens of billions if you count IPOs. After the 2008 crisis, everything changed. Russia suddenly became a second tier market, and business dried up. Then came sanctions, and investment banks didn’t have anything more to do. Compliances costs became so disproportionately high that it was easier not to have anything to do with Russian assets. Now it is impossible to build a model to calculate the return on investment in Russia: there are too many uncertainties. The country’s investment risk isn’t just high, it’s prohibitively high.”
Sanctions will be lifted, but not soon
“In the banking world it’s very important that, when you begin something, you also have a clear exit strategy. There is no clear exit strategy from sanctions. For example, let’s say that Western countries launched a project to pressure Russia and sanctions were a part of this project — they don’t have an exit strategy. I am convinced that returning Crimea can never be a viable condition. It is a priori impossible. If some kind of positive solution for Ukraine, then those advocating cancelling sanctions will find arguments in their favor. I think that, sooner or later, they will be lifted. But it might not be soon: history knows wars that last thirty or even a hundred year.”
Russian companies are like feudal states
“After you have worked for an international company, it is very difficult to work for a Russian company. International firms operate on the principle of a meritocracy; your career and compensation are calculated on the basis of what you do, and not on the basis of who is behind you — your mom or dad. Russian companies are more hierarchical, they operate on the principle of a one-man-show; they are feudal states. Russian people don’t believe in institutions, they believe in individuals and their ability to give orders and exercise control. The system suppresses initiative. The risk of doing something is higher than the risk of not doing anything.”
Too much state
“The Russian state is monopolistic. It doesn’t just support major companies, it also thinks that it can solve problems relating to scientific and technical progress by simply giving everyone KPIs… I don’t idealize the United States, but it is really a country of opportunities. People are focused on developing a product. One option is to create the conditions for this. In order for a person to invest money in a business, he has to be sure that he won’t be killed and his money won’t be stolen. The second, is to create Skolkovo [a government-sponsored innovation]. It’s also not bad, but innovation happens where a person sees opportunities. And not where the government said: “go and create there”, promising apartments and cars. First you have to establish economic freedom and level rules of the game, and then you can regulate.”
Deripaska has found a clever way of avoiding sanctions
Cement producer BaselCement, a company within Basic Element, Oleg Deripaska’s sanctioned company, has cleverly changed its name, place of registration and owner. Now it is called SMIKOM (Stroitelniye materiali i komplektuyushiye). Two sources close to Deripaska’s cement business told The Bell that the goal of the rebranding was to avoid sanctions (SMIKOM is not on the U.S. sanctions list and Deripaska still has ties to the business). Officially, the company denies this: they say that the new name is simply a better reflection of the company’s activities as Basel Cement trades not just in cement, but also in other building materials. The company is registered as an offshore company in Cyprus, and until 2018 it was owned by Deripaska via a chain of companies. Then, after sanctions were introduced, the company was transferred to a holding company. The owner of this company was the head of Deripaska’s private security service during the so-called aluminum wars of the 1990s. It is difficult to say if the ploy will work: officially the change of name is not a justification for having sanctions lifted. But it will likely mean that, at least at first glance, many will stop associating the company with Deripaska.
Putin to conquer the world with the help of AI
“If someone can build a monopoly in AI, he will become the leader of the world,” said Russian President Vladimir Putin at a meeting on artificial intelligence this week. Together with the government, state-owned Sberbank has developed a strategy to promote AI in Russia (The Bell obtained a copy of one of their presentations). It sounds extremely ambitious: by 2030, 20% of mid-sized companies, including state entities, should be using AI, and by 2024, Russian AI systems should be able to solve simple tasks better than humans. About $1.5 billion will be allocated for this development, a sizable sum in Russia. But it might not be enough for world domination: China is investing heavily in its AI program, and the U.S. will spend $4.9 billion in 2020 alone.
Cannabis kings from Russia
Unlike neighboring Georgia, Russia isn’t in a hurry to legalize marijuana. But this hasn’t stopped businessmen with Russian roots from creating the world’s largest marijuana business. The American marijuana producer, Curaleaf Holdings, is owned by well known financier, Boris Jordan, who worked in Russia for many years, and the former president of oil company Sibneft, Andrei Blokh. In early May, Curaleaf bought Select Oils from Cura Partners for $949 million. This acquisition pushed Curaleaf to the top of the rankings of marijuana producers in terms of revenue. In 2018, Curaleaf had total sales of $205 million, almost double those reported by its nearest rival, Trulieve Cannabis Corporation.
A Putin-linked rapper is working with the military on a fashion collection
Fashion label Black Star Wear this week showed off its joint collection created with Voentorg, a company owned by the Ministry of Defense. It featured everything from bomber jackets and chinos to military-style panamas. The owner of Black Star Wear, Timati, is a patriotic rapper who was involved in Putin’s 2018 re-election campaign. Timati has been a close friend of notorious Chechen leader Ramzan Kadyrov for years, and earns (Rus) millions from several business, including hamburger restaurants and tech start-ups. Even evidence of corner-cutting has done little to limit his success: just a few days after the presentation of the collection, the same shorts shown on the catwalk were found for sale on AliExpress for 780 rubles ($12). Timati was caught up in a similar scandal in March: then cordless Black Star headphones costing 7,000 rubles were found on AliExpress at one-third of the price, 1,500 rubles.